Purchasing a property is possibly one of the biggest financial commitments of your life. You may be inclined towards availing a home loan.

This is a common method of financing your purchase as buying a property outright is usually impossible for most people.

But there is more.

You will also have to select between a fixed vs floating interest rate.

Often, this can be a confusing decision for the prospective borrower. But having your concept clear about fixed and floating interest rates is vital.

After all, it has tremendous financial implications for you in the long run.

Let’s deep dive further.

What Is a Floating Rate of Interest?

As the term suggests, a floating interest rate keeps on changing depending on the volatility of the market. At the time of a home loan application, your lender will offer you a base rate. If you opt to go with the floating interest rate, your interest rate gets revised whenever there is a change in the base rate.

This means that your interest rate becomes a variable factor in the home loan.

Generally, floating interest rates work out to be cheaper in comparison to fixed rates in the long run by a good 1% - 2.5%. In most cases, the fluctuations in the rates are temporary in nature. However, it varies depending on current market trends.

When Should you Opt for a Floating Rate of Interest?

Floating interest rates are now extremely popular despite banks and NBFCs. It is the first choice for home loan takers.

The floating interest rate is directly linked to the base rate of the bank, and in turn, the Reserve Bank of India’s repo rate. For some lenders like Grihashakti, floating interest rates are linked to the Retail Prime Lending Rate or RPLR. Therefore, the monthly installment figure could change, in case of prevailing economic conditions. Lenders fix the base rate whenever there is a drastic change in the market parameters which in turn determines the home loan interest rate for the borrower.

In a nutshell, you should opt for the floating rate of interest under the following conditions:

• If you have a thorough understanding of the market and are able to figure out when the market rises or drops
• If you can gauge the indicators that the market will remain relatively stable during your home loan repayment tenure
• If you have a potential increase in income and the fluctuating home loan interest rates do not really bother you at all even if times a turbulent

If you are a salaried or self-employed person whose income will increase over the tenure of the loan, then a floating rate of interest is the best possible option, especially if you are using the loan to buy a house for non-business purposes. Thus, whenever you get an increment in salary, or extra income such as bonus/incentives from work, you can use the extra income to make pre-payments towards your home loan at absolutely no cost at all. Paying even as little as one extra EMI per year could help you repay the home loan much faster than the original loan tenure.

Thus, The floating interest rate is cost-effective in the long run.

What is a Fixed Rate of Interest?

Again, as the term suggests, a fixed rate of interest on your home loan implies that the interest rate is not a variable component. This means that the borrower will not be impacted by ongoing market conditions and trends.

You will continue to pay a fixed monthly installment to the lender during the repayment tenure of your home loan. This is ideal if you think that the market conditions will cause the interest rate to go up in the future, or if you don’t think that there’s any scope of home loan interest rates to reduce during the tenure of your loan.

When Should you Opt for a Fixed Rate of Interest?

The fixed rate of interest is decided by the banks taking into account the base rate or the MCLR - Marginal Cost of Funds based Lending Rate. Generally, the fixed rate of interest is offered to customers for a fixed duration of the home loan repayment tenure and not for the entire repayment period.

This means that the borrower can avail of the benefits of a fixed rate for a limited period of time only and will then have to migrate to a floating rate of interest. Generally, the period through which lenders allow borrowers to avail the fixed rate of interest varies between 2 to 10 years. This is decided by taking into account the home loan amount availed from the lender.

So, despite this being a fixed rate of interest, it is not without its fair share of uncertainties. Therefore, what makes the fixed rate of interest a more suitable option for home loan borrowers?

• If you have a limited understanding of market fluctuations and are unable to predict its highs and lows and how this impacts your home loan interest rate if you have gone with the floating mode.
• If you like being in control of your finances and want to keep your monthly outflow fixed.
• If you are fine with paying 1% - 2.5% more interest on your home loan.
• If you think that the market may rise a lot more where you may end up paying more on a floating interest rate.

This option is more suitable for those who want to use the funds to buy a property which may be used for business purposes. In such cases, pre-payments made during the tenure of the loan will attract foreclosure charges. At such times, having a fixed rate of interest would be more beneficial as it would help you plan your prepayments better, since there will be no change in the monthly EMI amount.

Fixed vs Floating Interest Rate - Which One Should You Choose?

How you wish to plan your finances will ultimately help you decide to choose between a fixed or a floating home loan interest rate.

If you are an individual who is absolutely focussed on maintaining a fixed monthly outflow, the fixed rate of interest will best suit your needs. However, do bear in mind that the fixed rate of interest will be available for only a limited duration of your home loan repayment period.

Eventually, you will have to migrate to the floating interest rate.

The good news is that your home loan amount is not really impacted by your choice of the type of rate of interest. You also have the option to convert mid-way from a floating to a fixed interest rate by paying a small conversion fee if you see that the interest rates are rising. On the other hand, if the rates are on their way up, you can foreclose the fixed rate home loan and shift it to a floating rate of interest.

In Conclusion

Take your finances into consideration before you make your decision between a fixed vs floating interest rate. SMFG Grihashakti offers home loans to eligible borrowers at affordable interest rates upto 90%* of the property value and with loan tenures upto 30 years*. If you are looking for a home loan, apply online today

To know more about home loan interest rates, simply call the customer service team on their toll free number 1800 102 1003 or email us at grihashakti@grihashakti.com to schedule an appointment.

*Terms and conditions apply